The Economic Velociraptors
While President Obama has taken to making obsequious comments about the CEOs of JP Morgan and Goldman Sachs, and how he doesn’t “begrudge” them their enormous winnings, Wall Street has been hard at work doing what it does best: impoverishing people. This month has been the turn of the Greeks and other poorer Europeans. In a nutshell, governments in Athens and elsewhere are being told that they must slash social spending to the bone and shrink their economy or else they won’t be allowed to borrow any more money. Dutiful press reports have dwelled on the concern of “investors” that the Greeks might default on their bonds, with consequent crisis for the Euro and possible disintegration of the European common currency.
For “investors,” read Wall Street gamblers – banks, hedge funds and other players. Scenting blood in the water, they have been busily placing enormous bets on whether the Greeks would go belly up or be helped out by the Germans. They do this through the medium of “credit default swaps”, a form of insurance against default by Greek or any other bonds. Typically, this kind of so-called insurance protection will be offered by a pension fund or some similar institution looking to earn a nice income from premium payments.
The buys of the protection will be hedge funds looking to make fast money if the insured bonds lose value and the seller has to pay out. Sitting between them is Goldman, JP Morgan, Bank of America or some other big bank who broker the trade between buyers and sellers. Since this market lacks any transparency – the banks have effortlessly crushed congressional initiatives for reform in this area — these spreads and consequent profits are huge.
Once everyone has made their CDS bets, the buyers will start beating down the value of the insured bonds – in this case the Greeks. The air has been thick with reports of imminent Greek default, the Greeks’ financial irresponsibility, etc etc. As the value of the bonds decreased, the CDS sellers had to pay out money to the buyers, “posting margin.” This is what Goldman Sachs did to AIG in 2008, thus ensuring the latter firm’s ruin.
With Greece “in play” the flow has ebbed back and forth. As the fate of Greece see-saws, both sellers and buys have been making money, as of course have the banks in the middle. None of this has much to do with the underlying condition of the Greek economy. There was no particular reason why Greece should have become a crisis just now, except that it was their turn. Joseph Stiglitz, one of the very few economists worth listening to, has been pointing out that the Greek economy is not in immediate crisis and that this has been a speculative attack, but most business commentators are not paid to report things that way. Instead, the Greeks have been admonished to pull their socks up, cut government spending by firing thousands of public employees (thus exacerbating the recession) and pay their debts.
In the hunt for the rich pickings offered by the situation, competition among major powers, ie Wall Street institutions, has been fierce. Someone, for example, told Der Spiegel this week, that Goldman-Sachs had nefariously helped Greece cover up the true depth of its debt situation through creative use of cross currency swaps, which involved “the Greek government issuing debt in yen and U.S. dollars which were than swapped for debt in euros over a specified period of time. After a period of years the currencies will be traded back to the original currency.” Though this would seem like a good deal for the Greeks in the short term, in the long term, reported Speigel it would cost them dearly.
The report was clearly inimical to the interests of Goldman. Asked to check whether it was nevertheless true, a former U.S. Treasury official told me that the story, “more smoke than fire,” had been leaked by a Goldman competitor, “Lazard, JP Morgan, Deutsche — take your pick,” adding that “the velociraptors are ripping chunks of flesh out of each other in a fight to the death.” Such wholesome plain speaking is not of course current in the White House, where Obama prefers the term “savvy businessmen,” at least when referring to JP Morgan and Goldman CEOs Jamie Dimon and Lloyd Blankfein in a recent interview with Business Week, to anything redolent of fearsome, carnivorous predators.
(Blankfein, according to Andrew Ross Sorkin’s book “Too Big to Fail,” displays a framed Gary Larson cartoon on his office wall. It depicts a father and son looking over the garden fence at a line of wolves entering the house next door. “I know you miss the Wainwrights Bobby,” the father is saying “but they were weak and stupid people, and that’s why we have wolves and other large predators.”)
Just when other poorer members of the European family were thankfully watching the Greeks get it in the neck while they escaped, a rumor swept Wall Street that Stanley Druckenmiller, master of the mighty hedge fund Duquesne Capital, was moving on to give Portugal the same treatment. Instantly, credit default swaps, ie bets, against the hapless Portugeese shot up, giving the Greeks a breathing space, before the herd moved on again to mangle the Euro itself.
But while the gamblers wreck their havoc on ancient nations, some of them of at least may be facing a comeuppance closer to home. CounterPunchers will recall that when Goldman and others on Wall Street sought to ruin the big trucking company YRCW over Christmas by sabotaging a debt reorganization while betting on the firm’s default and demise – thus eliminating 30,000 jobs – the Teamsters mobilized successfully and forced the offending parties to back off. “We got out of our position in a hurry,” one hedge find trader told me later, figuratively mopping his brow, “we didn’t want a bunch of angry Teamsters showing up at our door.”
However, while threatening to mount pickets at the premises of various institutions, Teamster President James Hoffa also contacted the attorneys general of various states, outlining the scheme then underway to bankrupt the firm. “We respectfully urge you,” wrote Hoffa on December 22, “to look closely at these financial firms’ questionable promotion of CDSs for YRCW bonds. CDSs, of course, are essentially insurance products that need strong oversight. However, the CDS issuers are not required to conform to the strict requirements of insurance regulations. We believe almost none of these regulations were followed here. As indicated, these financial firms’ injection of CDSs into YRCW’s bond exchange offer seems calculated to manipulate and collapse YRCW stock and bond prices, destroy attempts to save a large U.S. trucking company, and to otherwise defraud various stakeholders by creating an incentive for bond holders and others to promote the Company’s failure.”
CounterPunch has now learned that at least some of the state law enforcement officials contacted by the union are moving to take action. Officials in Pennsylvania, Alabama and New Jersey have taken the matter seriously enough to institute further investigation. New Jersey has called in the SEC, Pennsylvania has put the state Securities Commission on the case, and Alabama is mulling a criminal prosecution.
Should someone actually end up in the dock, they will doubtless be able to offer the defense that they were merely acting as “savvy businessmen.” We are all “in play.”